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Deductibility of Capital Subscription

19.A91. The Income Tax Assessment Act formerly allowed the deduction from assessable income of the owner of shares (other than redeemable shares) in a company of certain moneys paid by him to the company in respect of such shares, and applied by the company towards the paid-up value of the shares, where the company was carrying on a business of mining or prospecting in Australia or Papua New Guinea for certain minerals (including petroleum) and it had made a declaration that it proposed to spend or had spent the moneys on mining or prospecting outgoings. The owner must have been a resident of Australia or Papua New Guinea. To the extent that the deductions were available to shareholders, there were reductions of the deductions for capital expenditure available to the company under Division 10. (See section 77D). The section enabled in effect a transfer of the deduction for ‘allowable capital expenditure’ on mining (section 122A), on petroleum mining (section 124DD) and exploration expenditure (section 122J). It did not include expenditure on transport facilities deductible under Division 10AAA nor that incurred in acquiring a mining right or information. ‘Moneys paid on shares’ meant moneys paid by a company towards the paid-up value of the share, whether paid on application/allotment or to meet calls. See also section 122Q providing for the reduction of moneys otherwise deductible by the company.

19.A92. Further, section 77C of the Act allowed a deduction for moneys paid by shareholders as calls on shares in such companies. Such deductions, which were also available to a non-resident shareholder, did not involve any reduction of the deductions for capital expenditure allowable to the company under Division 10. The deduction was available when the company to which calls had been paid lodged a declaration stating that the money received would be spent on exploration or prospecting in Australia or Papua New Guinea for minerals (including petroleum). If these conditions were satisfied, one-third of so much of the calls as was included in the declaration lodged by the company was deductible from the assessable income derived by the person paying the calls. This did not include moneys paid on application or allotment.

19.A93. The differences between the section 77C deduction and the section 77D deduction were as follows:

  • (a) The declaration under section 77C must have related to exploration or prospecting expenditure. The declaration under section 77D could relate to such expenditure or other mining expenditure within Division 10, except expenditure in the acquisition of a mining or prospecting right or mining or prospecting information.
  • (b) The deduction to the shareholder under section 77C was one-third of calls, which excluded moneys paid on application or allotment which moneys were included under section 77D.
  • (c) As mentioned earlier, the deduction to the shareholder under section 77C did not involve any reduction in the deductions available to the company, as did the deduction under section 77D.

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